Going long: No one is cashing out in Fab's $1 billion mega round

By Sarah Lacy , written on June 27, 2013

From The News Desk

It's become popular for people to bag on Fab. Maybe it's jealousy. Maybe it's the openly stated Amazon-like ambition. Maybe it's because the founders once joked about firing you.

But I'm rooting for Fab for three reasons. None of the three have a thing to do with how much I like Fab as a consumer. It's pure entrepreneur-to-entrepreneur respect.

1. They openly set a goal of being huge, knowing anything less will be seen as failure. I love all-in ballsiness in an entrepreneur.

2. Jason Goldberg called out and aggressively took on those awful Samwer Brothers, in an era where everyone was caving to them. And Fab won; Bamarang closed.

3. Goldberg and his cofounder Bradford Shellhammer are putting their own money where their mouths are -- or should I say putting their own shares where their mouths are. While the pair did cash out a small amount of equity at the last round, they are not cashing out any shares at this new heady $1 billion valuation. No one is, according to Goldberg.

None of the existing $150 million that has closed, and none of the second tranche that's in the process of closing, will go towards secondary sales. That means no cash outs for Goldberg, for Shellhammer, or any other early investors. Every penny they can raise is going towards building the company. "Neither Bradford or I sold shares in this round and we did not allow any early investors to either," Goldberg says. "Priority one is to get the company the money it needs to achieve our plans before we allow early investors to cash out."

We can talk all day long about how secondaries are fair and align investors interest with entrepreneurs. About how they enable entrepreneurs to "go long" because they've already put a few million away for security. Secondaries were highly controversial in the mid-2000s but today everyone seems to agree that entrepreneurs wanting to cash out some stock isn't necessarily a bad data point, and that it doesn't necessarily signal any lack of faith in where things are going.

But when an entrepreneur hits a $1 billion valuation and doesn't sell any shares, it speaks volumes. Maybe the financially wise move would be to sell. Maybe Fab's shares will never be worth more. Maybe the founders are totally delusional. But at least they are signaling that they believe it when they say they think Fab will be the next Amazon.

Said one investor who declined to speak on the record, "We didn't discuss whether or not to sell Fab shares, but if the founders are sticking in that sends a strong signal. They don't even have the advantage of portfolio diversification that we do."

This is pretty unique these days. These things aren't always disclosed, but I'm hard pressed to think of a recent high-profile fundraise in the billion dollar range where there has not been some sort of cash out. Facebook was really the pioneer of this, with even its early investors like Peter Thiel and Accel selling parts of their ownership before the IPO as Facebook's valuation increased on the secondary markets. Groupon may have been the most egregious offender with much of that final $1 billion round going into early investors and executives' pockets. Phil Libin of Everynote openly encourages it – arguing that he wants his investor base to turn over to long-term shareholders well before an IPO. Our own Bryan Goldberg wrote about his own positive experience with secondaries earlier this week.

That said there are concerns that the trend is getting pushed to an extreme, particularly given this week's reports that Snapchat's founders are cashing out $10 million worth of equity each in their new round. That news struck many in the industry as too much of a payday way too early, making you wonder how much they believe in their own idea. Not necessarily the best message to send at a time when people are balking about Snapchat's valuation.

Beyond sending a signal of internal confidence, the move is wise because Fab is apparently an extraordinarily expensive company to build. If Goldberg and Shellhammer had cashed shares out at this price, it's possible early stage investors would have wanted to as well. Indeed, in recent weeks I've heard reports of debates within partnerships over whether early Fab investors should sell shares at the $1 billion price. By not allowing anyone to, Goldberg neatly shut the debate down. He did what most great entrepreneurs do: he led by example.

The last thing Fab needs is an excess of Fab stock on the market, especially given they may need to do yet another round in the future.